Investment update for December 2016
Australian market downplays weak GDP
Global markets generally appear to be supported by Central Bank policy outcomes, increases in commodity prices, and a positive outlook for global growth and inflation expectations.
The S&P500 trended upwards in the first half of December, supported by expectations that the proposed Trump policies will bring about greater economic and earnings growth in the US market. On 14 December, the US Federal Reserve implemented an interest rate increase of 0.25%. Although this increase was widely expected, the US Federal Reserve provided a more hawkish outlook on the economy and signaled a faster pace of rate hikes going forward.
The MSCI World ex-Australia Index (hedged into AUD) rose 2.9% over the month. In developed markets, Italy (13.7%) and Spain (8.9%) outperformed the broader market, while Hong Kong (-6.4%) and New Zealand (-1.1%) underperformed. The MSCI Emerging Markets Index (2.3%) underperformed unhedged developed markets.
Despite initial market skepticism, OPEC (Organization of the Petroleum Exporting Countries) announced a deal to reduce crude oil production by a combined amount of 1.2 million barrels a day (about 4.5% of its total output). Subsequently, 11 non-OPEC members also agreed to reduce production by 558,000 barrels a day starting 1 January 2017. This was a collaborative attempt to accelerate the natural process of rebalancing the oil market by reducing the current levels of oversupply. This deal boosted the price of Crude Oil WTI which ended the month 8.7% higher.
Citing improving economic conditions in China, increases in commodity prices and increasing headline inflation, the Reserve Bank of Australia (RBA) held interest rates at 1.5%. Although Australia’s GDP contracted by 0.5% in Q3, it is widely expected that this will rebound in Q4 and thus a technical recession will be unlikely. As a result, the Australian market ignored the weak GDP growth number and ended the month strongly.
The S&P/ASX300 Accumulation Index rose 4.3% in December. Small Cap stocks rose 3.6% for the month, while Large Caps stocks (4.5%) outperformed the broader market. Utilities (8.7%), Listed Property Trusts (6.8%) and Energy (6.1%) stocks outperformed, while Healthcare (0.9%) and Telecommunication Services (0.5%) were the worst performing sectors.
The Australian dollar depreciated in December against the USD (2.0%) and most developed market currencies in December, which resulted in a return for unhedged overseas equities of 4.5% (in AUD).
The Australian dollar was trading at US$0.7236 as at 31 December 2016.
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
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